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The Chinese government has agreed to allow foreign banks to underwrite local currency A-share listings and bonds as part of its strategy of encouraging Chinese companies to list in their domestic market, but they will still face restrictions on the terms of their joint ventures with Chinese brokerages.

With soaring Chinese A-share issuance this year, any loosening of restrictions on international banks' involvement in the domestic market offers huge potential benefits. Chinese issuers raised $73bn (€50bn) from 166 A-share deals in the year to date, a more than three-fold increase on the $21bn raised for full-year 2006, according to data from Dealogic.

The Chinese government has started to review applications for securities joint ventures again after it put this on hold two years ago. To date, foreign investors have been permitted to own a maximum stake of 33% of investment banking joint ventures and 20% of domestic stockbrokers.

These partnerships allow the international banks to structure and underwrite international transactions for the clients of Chinese brokerage companies. However, the Chinese government does not want a situation to develop where large proportions of the revenues from Chinese transactions are leaving the country as a result of these joint ventures.

Stephen Hamilton, a corporate finance solicitor at law firm Mills & Reeve, said: "The Chinese government is still likely to clamp down on joint ventures where a contractual agreement allows the international partner to channel a large part of the profits or revenues of the joint venture outside of China to the beneficial international owner."

Currently only Morgan Stanley, UBS, and Goldman Sachs have partnerships with securities firms in China but their level of control varies. Goldman Sachs bought a 33% stake in a venture formed with Gao Hua Securities in 2004, that gives the US bank the opportunity to gain management control in the future.

Meanwhile, Swiss bank UBS gained management control of a Chinese securities brokerage in 2006, renamed UBS Securities, while the board of directors retain the power to veto decisions. The joint venture is placed fourth in the league table of A-share bookrunners for the year to date with deals worth $6.3bn.

Morgan Stanley has had a joint venture with China International Capital Corporation since 1995, when it acquired a 34% stake. However, US bank does not have much influence on CICC, which is run by Zhu Yunlai, the son of former Chinese Premier Zhu Rongji. CICC has acted as bookrunner on nine A-share deals that raised $17.6bn so far this year, which is 24.1% share of the market.

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Morgan Stanley signed a strategic cooperation agreement with Shanghai-based China Fortune Securities last week and will take a 33% stake in the joint venture. It has yet to be determined what degree of control it will have over the new venture.

Credit Suisse also signed a memorandum of understanding to set up an investment banking joint venture with Founder Securities last week, according to a Reuters report.